Senior Citizens & Bankruptcy

Bankruptcy is often a good solution for elderly citizens struggling with debt -- but not always.

Decreasing pensions and rising health care costs are causing more and more elderly Americans to seek bankruptcy relief. Senior citizens enjoy certain advantages over other debtors when filing for bankruptcy. But for seniors that own a lot of nonexempt property, bankruptcy may not be the right choice. Read on to learn more about the issues that may affect senior citizens in bankruptcy.

(For an overview of each type of consumer bankruptcy, and detailed articles on all aspects of each, see our Chapter 7 Bankruptcy and Chapter 13 Bankruptcy topic areas.)

Bankruptcy Can Eliminate Your Medical Bills

Medical debt is one of the leading causes of bankruptcy for elderly citizens. Luckily, it is one of the easiest types of debt to discharge in bankruptcy. In fact, filing for Chapter 7 bankruptcy can wipe out your outstanding medical bills in just a few months. However, keep in mind that bankruptcy only eliminates debts that exist at the time of your filing. As a result, if you are about to incur more medical debt, consider waiting to file your bankruptcy to include all your medical bills.

For more information, see Should I Delay My Bankruptcy to Include All Medical Bills?

Protecting Your Home Equity in Bankruptcy

For many seniors, their home is their retirement nest egg. If you have equity in your home, you need to make sure that it will be safe in bankruptcy. In Chapter 7 bankruptcy, the trustee is authorized to take your nonexempt property (including your home equity) and use it to pay your creditors.

Fortunately, many states, as well as the federal bankruptcy exemptions, offer debtors a homestead exemption to protect a certain amount of equity in their home. In fact, some states even have a higher homestead exemption limit specifically for senior citizens. However, the amount of your homestead exemption (and whether you can use the federal exemptions) depends on the laws of your state. As a result, check your state’s bankruptcy exemptions (or talk to an attorney) before filing for bankruptcy to ensure you can exempt all of your property.

To learn about the homestead exemption law in your state, see our Homestead Exemption in Bankruptcy topic area.

Most Retirement Accounts Are Exempt in Bankruptcy

In addition to their home equity, many seniors also have a substantial amount of money saved in their retirement accounts. Under federal bankruptcy law, almost all legitimate tax exempt retirement accounts, including 401(k)s, 403(b)s, profit-sharing, money purchase, and defined-benefit plans, are entirely exempt in bankruptcy. IRAs and Roth IRAs are also protected up to $1,245,475 (this amount is adjusted every three years on April 1st; this number is valid as of April 1, 2013). This means that in most cases, your retirement funds are safe in Chapter 7 bankruptcy. (To learn more, see Your Retirement Plan in Bankruptcy.)

However, keep in mind that bankruptcy law only protects valid retirement funds. If your money is not in a legitimate retirement account or if the account is otherwise fraudulent, it will not be protected in bankruptcy.

Social Security Benefits Are Not Included in the Bankruptcy Means Test

Like most people, senior citizens must pass the bankruptcy means test to qualify for Chapter 7 bankruptcy. The means test compares your average monthly income against the state median to determine if you can file for Chapter 7 bankruptcy. If your income is too high, you may not be eligible for a Chapter 7. (To learn more, see our Chapter 7 Bankruptcy Means Test topic area.)

However, under bankruptcy law, any benefits you receive under the Social Security Act are not counted as income for means test purposes. Since most senior citizens collect Social Security benefits, this law favors seniors over other debtors in bankruptcy. As a result, if you have income in addition to Social Security, you may still be able to qualify for Chapter 7 bankruptcy. But keep in mind that your Social Security income must be disclosed in your bankruptcy budget on Schedule I, and may still be used to disqualify you if your budget shows a significant amount of disposable income each month. To learn more, see Is Social Security Income Counted in the Chapter 7 Means Test?

For other articles on whether bankruptcy is right in your situation, see Should I File for Bankruptcy?

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